Chapter 1 Introducing Financial Statements

Question 1

Is a Regulator an internal user or an external user?

Answer 1

external

Question 2

Is the CEO an external or internal user?

Answer 2

internal user

Question 3

Is a shareholder an internal or external user?

Answer 3

external user

Question 4

Is a marketing manager an internal or external user?

Answer 4

Internal user

Question 5

Is an executive employee an internal or external user?

Answer 5

Internal user

Question 6

Is an external auditor an external or internal user?

Answer 6

external user

Question 7

Is a production manager an external or internal user?

Answer 7

Internal user

Question 8

Is a nonexecutive employee an internal or external user?

Answer 8

External user

Question 9

Is a bank lender an internal or external user?

Answer 9

external user

Question 10

a graphical presentation of data to help people understand its significance and draw reliable inferences

Answer 10

data visualization

Question 11

What are the four basic types of analytics?

Answer 11

Descriptive analytics, Diagnostic analytics, Predictive analytics, Prescriptive analytics (a rising fifth is cognitive analytics (AI))

Question 12

Information and measurement system that identifies, records, and communicates relevant information about a company’s business activities

Answer 12

Accounting

Question 13

Equality involving a company’s assets, liabilities, and equity; Assets = Liabilities + Equity; also called “balance sheet equation”

Answer 13

Accounting Equation

Question 14

Resources a business owns or controls that are expected to provide current and future benefits to the business

Answer 14

Assets

Question 15

Analysis and report of an organization’s accounting system, its records, and its reports using various tests

Answer 15

Audit

Question 16

Individuals hired to review financial reports and information systems. Internal auditors of a company are employed to assess and evaluate its system of internal controls, including the resulting reports. External auditors are independent of a company and are hired to assess and evaluate the “fairness” of financial statements (or to perform other contracted financial services)

Answer 16

Auditors

Question 17

Financial statement that lists types and dollar amounts of assets, liabilities, and equity at a specific date

Answer 17

Balance Sheet

Question 18

part of accounting that involves recording transactions and events, either manually or electronically; also called recordkeeping

Answer 18

Bookkeeping

Question 19

Principle that requires a business to be accounted for separately from its owner(s) and from any other entity

Answer 19

Business Entity Assumption

Question 20

Corporation’s basic ownership share; also generically called “capital stock”.

Reflects inflows of cash and other net assets from shareholders in exchange for stock (stock is part of contributed capital and covered in later chapters)

Answer 20

Common Stock

Question 21

The basic concepts that underlie the preparation and presentation of financial statements for external users; can serve as a guide in developing future standards and resolving accounting issues that are not addressed directly in current standards using the definitions, recognition criteria, and measurement concepts for assets, liabilities, revenues, and expenses

Answer 21

Conceptual Framework

Question 22

Business that is a separate legal entity under state or federal laws; its owners are referred to as shareholders or stockholders.

Answer 22

Corporation

Question 23

The notion that the benefit of a disclosure exceeds the cost of that disclosure.

Answer 23

Cost Constraint

Question 24

Accounting principle that prescribes financial statement information be based on actual costs incurred in business transactions.

Answer 24

Cost Principle

Question 25

The notion that the benefit of a disclosure exceeds the cost of that disclosure.

Answer 25

Cost-Benefit Constraint

Question 26

Data visualization that includes charts, graphs, and other imaging organized for users to see important trends and relations.

Answer 26

Dashboard

Question 27

A process of analyzing data to identify meaningful relations and trends; in accounting, data analytics helps individuals make informed business decisions.

Answer 27

Data Analytics

Question 28

A graphical presentation of data to help people understand its significance and draw reliable inferences.

Answer 28

Data Visualization

Question 29

Corporation’s distributions of assets to its owners. Outflows of cash and other assets to shareholders that reduce equity.

Answer 29

Dividends

Question 30

Framework that depicts how organizations act as responsible stewards of the environment, principled members of society, and accountable leaders.

Answer 30

Environmental, social, and governance (ESG)

Question 31

Owner’s claim on the assets of a business; equals the residual interest in an entity’s assets after deducting liabilities; also called net assets or owner’s equity.

Answer 31

Equity

Question 32

Codes of conduct by which actions are judged as right or wrong, fair or unfair, honest or dishonest.

Answer 32

Ethics

Question 33

Happenings that both affect an organization’s financial position and can be reliably measured.

Answer 33

Events

Question 34

Expanded version of: Assets = Liabilities + Equity. For a noncorporation: Equity = Owner’s capital − Owner’s withdrawals + Revenues − Expenses. [For a corporation: Equity = Contributed capital + Retained earnings + Revenues − Expenses − Dividends.]

Answer 34

Expanded Accounting Equation

Question 35

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Answer 35

Expense Recognition Principle

Question 36

Outflows or using up of assets as part of operations of a business to generate sales. Decrease equity (via net income) from costs of providing products and services to customers; examples are costs of employee time, use of supplies, advertising, utilities, and insurance fees

Answer 36

Expenses

Question 37

External Transactions

Answer 37

Exchanges of economic value between one entity and another entity

Question 38

Persons using accounting information who are not directly involved in running the organization.

Answer 38

External Users

Question 39

Area of accounting aimed mainly at serving external users.

Answer 39

Financial Accounting

Question 40

Independent group of full-time members responsible for setting accounting rules.

Answer 40

Financial Accounting Standards Board (FASB)

Question 41

Principle that prescribes financial statements (including notes) to report all relevant information about an entity’s operations and financial condition.

Answer 41

Full Disclosure Principle

Question 42

Rules that specify acceptable accounting practices.

Answer 42

Generally Accepted Accounting Principles (GAAP)

Question 43

Principle that prescribes financial statements to reflect the assumption that the business will continue operating

Answer 43

Going-concern Assumption

Question 44

Financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses

Answer 44

Income Statement

Question 45

All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies

Answer 45

Internal Controls or Internal Control System

Question 46

Activities within an organization that can affect the accounting equation

Answer 46

Internal Transactions

Question 47

Persons using accounting information who are directly involved in managing the organization.

Answer 47

Internal users

Question 48

Group that identifies preferred accounting practices and encourages global acceptance; issues International Financial Reporting Standards (IFRS)

Answer 48

International Accounting Standards Board (IASB)

Question 49

Set of international accounting standards explaining how types of transactions and events are reported in financial statements; IFRS are issued by the International Accounting Standards Board.

Answer 49

International Financial Reporting Standards (IFRS)

Question 50

Creditors’ claims on an organization’s assets; involves a probable future payment of assets, products, or services that a company is obligated to make due to past transactions or events.

Answer 50

Liabilities

Question 51

Organization form that combines select features of a corporation and a limited partnership; provides limited liability to its members (owners), is free of business tax, and allows members to actively participate in management.

Answer 51

Limited liability company (LLC)

Question 52

Area of accounting aimed mainly at serving the decision-making needs of internal users; also called management accounting.

Answer 52

Managerial Accounting

Question 53

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses

Answer 53

Expense recognition (or matching) principle

Question 54

Principle that prescribes financial statement information, and its underlying transactions and events, be based on relevant measures of valuation; also called the cost principle

Answer 54

Measurement principle

Question 55

Owners of a limited liability company (LLC); rights and responsibilities are specified in the operating agreement and by state LLC regulations

Answer 55

Members

Question 56

Principle that assumes transactions and events can be expressed in money units.

Answer 56

Monetary unit assumption

Question 57

Amount earned after subtracting all expenses necessary for and matched with sales for a period; also called income, profit, or earnings

Answer 57

Net income

Question 58

Excess of expenses over revenues for a period

Answer 58

Net loss

Question 59

Assets put into the business by the owner.

Answer 59

Owner investments

Question 60

Unincorporated association of two or more persons to pursue a business for profit as co-owners

Answer 60

Partnership

Question 61

Business owned by one person that is not organized as a corporation; also called sole proprietorship.

Answer 61

Proprietorship

Question 62

Part of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping

Answer 62

Recordkeeping

Question 63

Cumulative income less cumulative losses and dividends.

Answer 63

Retained earnings

Question 64

Ratio reflecting operating efficiency; defined as net income divided by average total assets for the period; also called return on total assets or return on investment.

Answer 64

Return on assets (ROA)

Question 65

The principle prescribing that revenue is recognized when goods or services are delivered to customers.

Answer 65

Revenue recognition principle

Question 66

Gross increase in equity from a company’s business activities that earn income; also called sales. Increase equity (via net income) from sales of products and services to customers; examples are sales of products, consulting services provided, facilities rented to others, and commissions services

Answer 66

Revenues

Question 67

Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.

Answer 67

Securities and Exchange Commission (SEC)

Question 68

Owners of a corporation; also called stockholders.

Answer 68

Shareholders

Question 69

Equity of a corporation divided into ownership units; also called stock

Answer 69

Shares

Question 70

Business owned by one person that is not organized as a corporation; also called proprietorship

Answer 70

Sole proprietorship

Question 71

A financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, investing, and financing.

Answer 71

Statement of cash flows

Question 72

Report of changes in retained earnings over a period; adjusted for increases (net income), for decreases (dividends and net loss), and for any prior period adjustment.

Answer 72

Statement of retained earnings

Question 73

Equity of a corporation divided into ownership units; also called shares.

Answer 73

Stock

Question 74

Owners of a corporation; also called shareholders.

Answer 74

Stockholders

Question 75

Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.

Answer 75

Time period assumption

Question 76

Opportunity, Rationalization, Pressure

Answer 76

The three factors that push a person to commit fraud

Question 77

Objectives - provide useful info, Qualitative Characteristics - require info that has relevance and faithful representation, Elements - define items in financial statements, Recognition and measurement - set criteria for an item to be recognized as an element; and how to measure it

Answer 77

FASB conceptual framework

Question 78

General principles are the assumptions, concepts, and guidelines for preparing financial statements

Answer 78

One of two types of accounting principles (and assumptions)

Question 79

Specific principles are detailed rules used in reporting business transactions and events

Answer 79

One of two types of accounting principles (and assumptions)

Question 80

The 4 Accounting Principles

Answer 80

1. Measurement principle (cost principle), 2. Revenue recognition principle, 3. Expense recognition principle (matching principle), 4. Full disclosure principle

Question 81

The 4 Accounting Assumptions

Answer 81

1. Going-concern assumption, 2. Monetary unit assumption, 3. Time period assumption, 4. Business entity assumption

Question 82

Accounting Equation

Answer 82

Assets = Liabilities + Equity

Question 83

Expanded Accounting Equation

Answer 83

Assets = Liabilities + Common Stock - Dividends + Revenues - Expenses

Question 84

Four Parts of Equity

Answer 84

(contributed capital) + Common Stock, (retained earnings) - Dividends + Revenues - Expenses

Question 85

Revenues - Expenses = Net Income Describes a company's revenues and expenses and computes net income or loss over a period of time

Answer 85

Income Statement

Question 86

Beg. retained earnings + Net Income - Dividends = End. Retained Earnings Explains changes in retained earnings from net income (or loss) and any dvidends over a period of time

Answer 86

Statement of Retained Earnings

Question 87

Assets = Liabilities + Equity Describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time

Answer 87

Balance Sheet

Question 88

+/- Operating C.F +/-Investing C.F +/-Financing C.F. = Change in Cash Identifies cash inflows (receipts) and cash outflows (payments) over a period of time

Answer 88

Statement of Cash Flows

Question 89

Return on Assets Equation

Answer 89

Return on Assets = Net Income/Average total Assets